BETHESDA, MD – In a paper published recently in the journal Health Affairs, health policy researchers are proposing a new method of allocating Medicaid disproportionate-share hospital payments.

Congress and the Obama administration are considering redirecting federal spending on the Medicaid disproportionate-share hospital (DSH) program to help pay for expanding coverage to uninsured Americans.

Aaron McKethan, research director of the Engelberg Center for Health Care Reform at the Brookings Institution, and his coauthors say their proposal could save the federal government more than $40 billion over 10 years without exposing hospitals to uncertain or across-the-board spending cuts, while also gradually reducing state variations in Medicaid DSH funding.

Specifically, McKethan and his colleagues propose linking federal Medicaid DSH payments to state-level Medicaid enrollment or uninsured populations, or both.

The Medicaid DSH program was enacted in 1981 to support hospitals serving a large number of Medicaid and uninsured patients, but states have used several mechanisms to draw down federal funds without providing the required level of state matching funds.

These and other practices have led to rapid growth in federal Medicaid DSH spending and major variations in federal funding across states.

“Given the importance of supporting safety-net hospitals and the need to ensure the integrity of federal spending ... policymakers ... should also address these broader issues,” write McKethan and his coauthors.

The paper also proposes new steps to ensure that the Medicaid DSH program provides more direct aid to the vulnerable populations it was designed to support.